CTP Chapter 20

Question 1

A type of security issued by an American custodian bank to allow American investors to trade stock in a non-US company

Answer 1

American depositary receipt (ADR)

Question 2

The mix of long-term debt (in the form of term loans and various types of bonds) and equity (in the form of preferred stock, common stock, and retained earnings) used to fund the assets held by a firm

Answer 2

capital structure

Question 3

A form of voting that allows a shareholder as many votes per share owned as there are open positions on the board in the same election.

Answer 3

cumulative voting

Question 4

A situation that occurs when payments on loans, sales of stock, or other transactions are interpreted by tax authorities as an attempt by a company to avoid paying taxes on dividends. The payments may be considered dividends and appropriate taxes charged. These are a potential issue for any global company and can vary significantly from country to country.

Answer 4

deemed dividend

Question 5

The date when the board of directors announces a dividend.

Answer 5

dividend declaration date

Question 6

A company’s policy regarding whether to pay dividends and, if so, how much and when to pay. These are typically set by the chief executive officer or board of directors, often after a recommendation from the treasurer.

Answer 6

dividend policy

Question 7

The date on which all shareholders of record become entitled to receive a declared dividend. Also known as a shareholder-of-record date, or just holder-of-record date.

Answer 7

dividend record date

Question 8

A plan that enables existing shareholders to purchase additional shares directly from the company on a when-desired basis, normally with no commission or with only a small processing charge. These plans also allow investors to elect to reinvest dividends automatically in additional shares of company stock.

Answer 8

dividend reinvestment plan (DRIP)

Question 9

A theory that dividends have information content or a signaling effect. Dividends are observed to contain information that signals management’s intentions to investors and may provide information regarding expected future earnings.

Answer 9

dividend signaling

Question 10

The first date on which a stock is sold without entitlement to the upcoming dividend. This date is usually one business day prior to the shareholder-of-record date, thereby enabling brokerage firms to send an updated list of shareholders to a company on time.

Answer 10

ex-dividend date

Question 11

Under US Generally Accepted Accounting Principles (US GAAP), a type of lease that has terms that are different from those of operating leases. These are essentially an alternative to borrowing the funds and purchasing the asset in question. Referred to as a capital lease before Accounting Standards Codification (ASC) 842.

Answer 11

finance lease

Question 12

The acquisition of one company (called the target company) by another (called the acquirer) that is accomplished by going directly to the target company’s shareholders to get the acquisition approved.

Answer 12

hostile takeover

Question 13

A type of dividend on intragroup shareholdings. It is often used in large companies with wholly owned subsidiaries to transfer profits from subsidiaries back to the parent company.

Answer 13

intercompany dividend

Question 14

A type of acquisition that is financed using a significant proportion of debt, with the primary form of collateral being the acquired firm’s assets.

Answer 14

leveraged buyout (LBO)

Question 15

The mix of long-term debt and equity that produces the minimum weighted average cost of capital for a firm.

Answer 15

optimal capital structure

Question 16

A bond without a maturity date. The issuer makes a regular interest payment but is never required to repay the principal.

Answer 16

perpetual bond

Question 17

A shareholder right that provides existing shareholders the first right to purchase shares of any new stock issue on a pro rata basis (i.e., based on the current proportion of shares owned).

Answer 17

preemptive right

Question 18

The transfer of funds from foreign subsidiaries back to the parent company in the home country.

Answer 18

repatriation of capital

Question 19

(1) The amount of value remaining after all allowable depreciation charges have been subtracted from a depreciable asset’s book value. (2) The estimated value of an asset at the end of a lease.

Answer 19

residual value

Question 20

The opposite of a stock split, this is a process in which a company merges two or more existing shares of stock to create one share of new stock. This is done to increase the company’s share price.

Answer 20

reverse split

Question 21

A dividend that is paid on a one-time basis, rather than as a regular quarterly dividend.

Answer 21

special dividend

Question 22

A dividend that pays shareholders additional shares of stock rather than cash dividends.

Answer 22

stock dividend

Question 23

A practice where a company uses some of its profits to purchase existing shares of its stock, either on the open market or directly from shareholders.

Answer 23

stock repurchase

Question 24

A process in which a company splits each existing share of stock into more than one share at a reduced share price, thereby placing the stock into a more desirable price range. The basic idea is that an optimal trading range exists for a stock’s price.

Answer 24

stock split

Question 25

The specific capital structure that a company has set as its desired structure. This is typically the mix of debt and equity the company will use in raising new capital.

Answer 25

target capital structure

Question 26

A description of a company that has a very small amount of capital or initial investment in relation to the amount of business the company conducts. The term is often used by taxing authorities in referring to subsidiary companies run by foreign corporations with minimal initial investment.

Answer 26

thinly capitalized